1.2 ACIS211Week1BM_Lecture_two

1.2 ACIS211Week1BM_Lecture_two - ACIS211 Lecture two...

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Unformatted text preview: ACIS211 Lecture two ACIS211 Lecture two NZ IAS 1 & 8 Presentation of financial statements & Accounting Policies, Changes in Accounting Estimates and Errors Objectives Objectives To identify the elements of NZ IAS 1 To be able to use the formats of NZ IAS 1 To account for Accounting Policies, Changes in Accounting Estimates and Errors Elements of financial statements Elements of financial statements Assets Definition Recognition Future economic benefit The benefits must be controlled by the entity The event that causes the control must have happened Probable that future economic benefits will flow The asset has a cost or value that can be measured Elements of financial statements Elements of financial statements Liability Definition Recognition Future disposition of economic benefits to other entities Present obligation A past transaction or event caused the obligation Probable that an outflow will result The amount can be reliably measured Elements of financial statements Elements of financial statements Expenses Definition Recognition Decrease in economic benefit during the period Result in decreases to equity Not related to distributions Recognised when decrease in future economic benefit related to a decrease in asset or increase in a liability occurs and is measurable Elements of financial statements Elements of financial statements Income Definition Recognition Increase in economic benefit durign the period Result in increase in equity Not related to contributions from equity holders Recognised when increase in future economic benefit related to an increase in asset or decrease in a liability occurs and is measurable Elements of financial statements Elements of financial statements Equity Definition Residual interest in assets of entity after deduction of its liabilities Criteria for assets and liabilites therefore very important to calculate equity NZ IAS presentation formats NZ IAS presentation formats Statement of comprehensive income (p. 569­571) Function of expense Nature of expense Statement of financial position (p. 129) Statement of cash flows (p. 642­643) Statement of changes in equity (p. 573) Key Issues Key Issues Users’ judgements about the activities of an entity are based on the evidence presented in the financial statements Comparison of different companies or periods is difficult when the policies used have changed When alterations are made to accounting policies the adjustments made affect the position and the profitability of the company There is the potential for fraud when profits or balance sheets are manipulated by changing the policies used The presentation can be manipulated (deliberately or inadvertedly) Objective of NZ IAS 8 Objective of NZ IAS 8 The standard sets out: Criteria for selecting and changing policies Accounting treatments and disclosure for changes and errors Disclosure for policies is set out in NZ IAS 1 The standard is intended to enhance reliability and relevance of financial statements over time and different periods Scope of NZ IAS 8 Scope of NZ IAS 8 Definitions Accounting Policies Changes in accounting estimates Selection and application of accounting policies Consistency of accounting policies Changes in accounting policies Disclosure Errors Impracticability of retrospective application and restatement Limitations on retrospective restatement Disclosure of previous period errors Definitions Definitions Accounting policies The specific principles, bases , conventions, rules and practices applied Changes in accounting estimates An adjustment to the carrying amount of an asset or liability based on new information or developments not to errors Material Omissions or misstatements Are judged on the effect on the judgement of the users to make economic judgements based on the financial statements Definitions Definitions Prior period errors are The failure to use or to misuse information that Was available Could be reasonable expected to have been obtained Included are math errors, mistakes in applying policies, oversights or misinterpretations Retrospective application Is applying a new policy to events as if the policy had always applied Definitions Definitions Retrospective restatement Is the correction of the effects of previous financial statements Impracticability It is impractical for an entity to make retrospective application or restatement if: The effects are not determinable The application requires judgement of management intent in that period The application or restatement requires significant estimates that are difficult to establish objectively Definitions Definitions Prospective application Announcing a date and reasons for making a change in policies Recognising the effect of the change in current and future periods Accounting Policies Accounting Policies Selection and application of Accounting Policies Appropriate policies are disclosed in specific standards In the event that a standard does not specify a treatment management can make a decision to apply a policy that is: Relevant Reliable for: The position, performance and cash flows of the entity Reflect the economic substance of the events Are neutral, prudent and complete Accounting Policies Accounting Policies Consistency of Accounting Policies Accounting policies shall be applied consistently across periods Policies should be applied specifically to each item unless the standard allows for categorisation of similar items. Changes in Accounting Policies Changes are only permitable if: A standard or interpretation requires it There are reliability or relevance issues (this is so users can compare trends etc over time) Accounting Policies Accounting Policies Not defined as changes Policies applied to events that are different from those already occurring New policies made or applied to events or items that previously did not occur or were immaterial Accounting Treatment Accounting Treatment The accounting treatment is applied to the asset/ event etc that is concerned and to the equity component that is relevant (generally retained earnings) Dr/Cr Account concerned Dr/Cr Retained Earnings xxx xxx Notes to the financial statements Notes to the financial statements Include: The title of the standard applied The nature of the change For the current and previous periods the amount of adjustment for each item affected, including Earnings per Share (NZ IAS 33) The amount of the adjustment for previous periods A description of the circumstances that lead to the change and of when and how it has been applied Voluntary changes made Voluntary changes made Include: The nature of the change The reasons why the change makes the statements more reliable and relevant The amount of the adjustment for the period and the previous periods presented for each item affected including Earnings per Share (NZ IAS 33) A description of the circumstances that lead to the change and of when and how it has been applied Changes in accounting estimates Changes in accounting estimates Estimates may be applied to: Inventory obsolesce Fair value of assets or liabilities Useful live of items Warranty obligations Accounting Treatment Accounting When changes in estimates have occurred, the change and the effect need to be journaled Cr/Dr Cr/Dr Item xxx Profit/loss xxx Errors Errors Material errors or deliberately made immaterial errors make the financial statements prepared not comply with NZ FRS Where such are found retrospectively they need to be corrected for the period and all comparative information based on that period by: Restating the comparative amounts for the period corrected Restating the opening and closing balances of items affected for the earliest affected period Previous periods will re restated until it is impractical to determine the period specific effects or cumulative effects of the error This may apply to the current period The earliest period practical will have the opening balance and closing balance of the item restated The effect of the error is not accounted for in the current period Any alterations should be made to the previous statements including comparative information Errors are separated from adjustments to estimates as estimates require adjustments to remain relevant and reliable Limitations on retrospective Limitations on retrospective restatement Disclosure of previous period errors Disclosure of previous period errors The nature of the period error For each period (practical); the amount of the correction for each line item and Earnings per Share (NZ IAS 33) The opening balance at the start of the earliest period The date and reason for why restatement became impractical Impracticability of retrospective application and Impracticability of retrospective application and restatement It may be impractical to restate or reapply a policy to earlier period(s) where: No data was collected during the period and It is impractical to recreate the information Impracticability of retrospective application and Impracticability of retrospective application and restatement Estimates Estimation is inherently subjective and requires judgement Some of these judgements will be made after the balance date Therefore it is very difficult, even impossible, to retrospectively make an estimate for previous periods Once this occurs no previous adjustment to statements needs to be made Impracticability of retrospective Impracticability of retrospective application and restatement Errors treated retrospectively need to: Provide evidence of circumstances existing on the dates the event occurred Provide evidence of the information available when the financial statements were available Impracticability of retrospective Impracticability of retrospective application and restatement Retrospective application or restatement should not be made when: Significant estimates are required to be made Hindsight is required to make an assumption about managements intentions What you need to do What you need to do Learn the definitions in the Framework Look at some reports for accounting policies Be able to account for errors and changes in estimates ...
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